In an extensive op-ed in Financial Times, Bill Gross details how today’s low yields threaten to cause a cycle of stagnation and decay. Gross and I agree that the low yields will have a detrimental effect on pension funds (read here, here and here). Gross takes it a step further to the knock on effects of what poor pension fund performance will mean for corporate profitability and ultimately the economy.
There are other obvious drawbacks to near-zero yields and interest rates. Historic business models with long-term liabilities — such as insurance companies and pension funds — are increasingly at risk because they have assumed higher future returns and will be left holding the short straw if yields and rates fail to return to more normal levels.
The profits of these businesses will be affected as will the real economy. Job cuts, higher insurance premiums, reduced pension benefits and increasing defaults: all have the potential to turn a once virtuous circle into a cycle of stagnation and decay.
Central bankers are late to this logical conclusion. They, like most individuals, would prefer to pay later than now. But, by pursuing a policy of more QE and lower and lower yields, they may find that the global economic engine will sputter instead of speed up. A change of filters and monetary policy logic is urgently required.
